Owning a house is a significant goal in anyone’s life. This is true not only because a house is a significant investment in terms of money but also in terms of commitment. Many people spend their entire lives living in the same house or at least the same area.
Many people spend their entire life savings to buy a house. A home is an investment as it retains value. However, it is much more than a store of value. It is a place of comfort, relaxation, security, and privacy.
It is essential, as a result, to ensure that the house we buy and reside in is consistent with the teachings of Islam. It should be acquired by fair means.
1. What is an Islamic mortgage and how do they work?
Sharia-compliant mortgages are really ‘mortgage alternatives’ and function as no-interest home purchase plans.
Though there are several variations across the market, all work in the same basic way: the bank buys the property on your behalf and becomes the legal owner.
Your monthly payments function more like rent, with a portion going towards buying out the property owner’s stake.
At the end of the term you should either have bought the property back, or have an outstanding sum left to settle before you become the legal owner.
2. Typical Home Mortgage Terms
Typically, buying a house is consistent with home financing in the form of a mortgage. Financial institutions, especially banks, are involved in processing home mortgage requests.
This is because the entire premise of a mortgage is based on interest. Interest or usury is strictly prohibited in Islam. Allah says in the Holy Quran:
“Taking interest despite its prohibition and consuming people’s wealth unjustly. We have prepared for the disbelievers among them a painful punishment.” [4:161]
The verse quoted above clearly indicates that any transaction based on the taking or giving usury is forbidden in Islam. Muslims should not engage in receiving or taking an interest.
Unfortunately, the entire banking system worldwide is based on interest. Fractional reserve banking enables banks to lend out more money than they have as deposits.
All the money banks receive as deposits or payments are further lent out on interest. This means even the money you provide as a down payment is eventually loaned out.
Furthermore, a house mortgage requires borrowers to provide a down payment as a deposit and a fixed amount each month. This amount does not only consist of the installment of the remaining amount that the house is worth but also the interest.
So, by taking a home mortgage, not only are you providing money to an institution that uses the same money to earn interest by lending. You are also interested since the monthly mortgage is a sum of the amount remaining to be paid throughout the mortgage period plus the interest on the amount borrowed. This makes the typical home mortgage schemes contrary to the teachings of Islam.
3. How Can a Muslim Buy a House?
Well, one can permanently save up money and pay for the house upfront. Like buying anything, we must earn enough to afford the house.
The reality is that a house is unlike any other thing that we buy. It costs much more than we can realistically save. Some people may need more money to buy a house. Some may work their entire lives only to afford a house that barely meets their requirements. It is a difficult task to achieve.
At the same time, having a roof over your head and protection against the elements is a fundamental human right.
Islam is a religion that is consistent with human nature. While it prohibits certain things, which are harmful to us and others, it also provides ease. A Halal mortgage provides a solution to the dilemma of owning a house. A halal mortgage makes it easy for people to realize their dream of owning a house while remaining within limits set by Islam.
4. Sharia Compliant Mortgage
The most significant aspect of an Islamic mortgage is that it is Sharia-compliant. Sharia is an Islamic doctrine that sets outs the rules and regulations that Muslims must follow.
Since Islam forbids transactions that involve interest, a Sharia-compliant mortgage is free of interest. This means banks and financial institutions that provide Halal mortgage financing do so without charging an interest rate.
Yet, charging interest on loans is the primary source of income for banks. So how are banks that offer Islamic banking services able to provide housing mortgages without incurring a loss?
This is a massive problem if banks are viewed as entities that give out loans and charge interest in return. Islamic finance has a solution to the problem. It avoids interest while enabling people to own a house and financiers, be it banks or any other institution, to benefit from the transaction.
5. Types Of Halal Mortgage Financing
Islam provides not one, but three different ways home mortgages can work. These include:
Ijarah refers to an Islamic lease contract. It is a contract that can take place between two parties, and these can be institutions or individuals.
Per the Ijarah contract, the lessor owns the asset being leased out. The lessee is the party that enjoys the benefits of the asset being leased. The lessee pays a regular rental amount for the period of the lease. The rent lasts until the termination of the lease agreement. The rent is determined by the market.
Where Ijarah can become a mortgage is when the contract is designed to be a lease-to-own agreement. The lessee can pay an amount over the rent amount. The extra amount will go towards buying the asset.
This means that by the end of the lease agreement, the lessee has paid off not only the rent due in each period but also the market value of the asset decided when the agreement was signed. The asset is legally transferred to the lessee from the lessor once the Ijarah contract is completed.
Typically, Musharaka is profit-and-loss sharing. It involves different parties pitching in finances and sharing the profit or loss resulting from the investment. Each party’s profit or loss is determined based on its share of the investment.
In-home financing, the concept of diminishing Musharaka is applied. Per this Musharaka agreement, the Islamic bank and future homeowner agree to pitch in the funds. Once the house is purchased using the combined funds, the future homeowner pays off the share the Islamic bank provided in installments.
This means that over time, the share of the Islamic bank decreases while that is the homeowner increases.
Since the installments make allowances for the going market rate of the property, any capital gains or losses incurred as passed onto the owners.
The final option through which a person can get interest-free home financing is through a Murabaha agreement. This agreement involves the Islamic bank buying the home the homeowner wants to buy.
The bank then draws a contract to sell the property at a reasonable markup. The property’s price, along with the markup,is paid in installments.
Much like the Musharaka, at the end of the Murabaha agreement, the property rights of the house are transferred over to the person seeking the mortgage.
Similarly, the bank or financial institution earns a profit by assisting with the transaction. The bank gets a fair amount for being willing to buy the house lump-sum and providing it in installments.
6. Terms And Conditions
Sharia-compliant financial tools are an excellent alternative to the typical home mortgage. The result is the same, a transfer of ownership from the bank to the individual applying for the mortgage.
There are, however, some terms and conditions that need to be considered. Islamic banks take on a risk by purchasing the property on behalf of a future homeowner. This is especially true for Musharaka contracts, where there is a possibility of loss since the price is determined by the current market rate.
To manage this risk and encourage banks to offer Islamic financing for homeownership, certain risks are passed onto the customer seeking a mortgage. This includes paying for insurance. The Islamic instrument for insurance is called Takaful and is an interest-free form of insurance.
Furthermore, additional costs associated with the purchase of the property, like the transfer costs or costs of getting the documentation done, are all borne by the party seeking the mortgage. These are also defined in the contract, whichever of the three may be.
7. Owning A Home in Islam
Owning property and assets is not forbidden in Islam as long as it is financed by lawful means. Many of the Holy Prophet Muhammad (SAWW)’s companions were well-off. Owning a house is not prohibited.
The prohibition is on the ownership of a house, or any asset, through illegal means. This includes unlawful business activities or even mortgage financing that is based on interest or usury.
Dealing with interest is strictly forbidden in Islam. This includes paying interest as well as charging interest on borrowed money.
There are ways in which people can buy a house without going against the teachings of Islam. Halal mortgage financing is becoming more and more common as more Muslims are seeking home ownership. Islamic finance provides plenty of options and instruments to provide home mortgage facilities to Muslims.
Looking for Islamic banking options in countries where Muslims are in the minority can be challenging. However, many online resources like Muslim Pro have made it relatively easy.
Online communities on Islamic forums contain a wealth of information that is available for free. You can even get opinions and explanations from experts, like Islamic scholars studying Islamic financing in depth.
Also read 5 Halal Food Brands that are Easily Available.